Why it makes sense for entrepreneurs and VC’s to be ethical– Deepak Srinath

Recently, I was talking to a partner in a top VC fund about why the fund had passed a particular investment opportunity. The startup we were discussing had created a lot of buzz, revenues were growing faster than their competitors and the founding team was aggressive and impressive. The partner replied that the fund had decided not to invest because they were not comfortable with the ‘moral compass’ of the founders. Investors often find themselves in a dilemma about the ‘moral compass’ of founders, i.e, the innate sense of ethical right or wrong on the basis of which an individual makes business decisions.

As an I-banker I’ve encountered plenty of entrepreneurs with dodgy moral compasses. The misdemeanors range from showing inflated sales numbers to shortchanging customers intentionally. There are times when I’ve even had serious doubts about an entrepreneur’s intention of using VC money for the right purpose. With some entrepreneurs its just a gut feel that something is amiss even if you can’t put a finger on it.

Conversely, I’ve been in situations that have exposed the moral compass of funds. A couple of years ago, we were in the process of raising funds for an internet firm.  A VC showed great interest in our client and we shared all the data on the business with them. A couple of weeks later, we found out that the VC had issued a termsheet to a close competitor of our client. One can argue that this situation is normal- A VC will evaluate all the players in a space and make a decision on whom to invest in. This is perfectly fine and part of the VC game.  However, a few days later when our client happened to meet the CEO of the firm the VC had decided invest in, he was shocked to discover that his competitor seemed to know everything about his numbers and growth strategy. Clearly, the data we had shared with the VC had found its way to the firm’s competitor.

In an industry that is more often than not on thin ice when it comes to ethics, why is it so important to possess the right moral compass? I think its not just about taking a moral high ground; it actually makes solid business sense to do so. The world of Entrepreneurship and Venture capital is a relatively close-knit and well informed group, especially with social media and blogs disseminating stories instantly. The best entrepreneurs will never want to raise money from an investor with a dodgy track record. Similarly, an entrepreneur who cuts corners will get caught out sooner rather than later and will never be able to raise a follow on round or attract the best talent, leave alone build a scalable and sustainable business.

I hope the anti corruption fervor in Indian society spills over to the entrepreneurial and investing world too. What do you think?

Advertisements

Cash on Delivery- The catalyst for E-tailing in India? – Deepak Srinath

I often hear people saying that e-commerce entrepreneurs in India have it easy when it comes to ideas for their startups- they simply have to look at what has worked in the US and copy that model. Group Buying sites inspired by Groupon are the favorite examples used to illustrate this. Sure, E-commerce startup’s in India are by and large inspired by successful US models – Group buying for services and products, private sales for fashion, flash sales for electronics and accessories, category specific sites such as baby products or shoes…you name the e-commerce startup in India and there is a corresponding US model. However, it would be massively unfair to Indian E-commerce entrepreneurs not to give them credit for the clever and sometimes subtle adaptations to suit Indian markets and consumers. Perhaps the most significant and game changing of all these innovations is the ”Cash on Delivery’ (COD) payment option. In fact, I will stick my neck out and say that the e-tailing business in India owes its explosive growth to COD.

For a long time any discussion or article on E-commerce in India centered around the twin problems of low internet penetration and low debit/credit card base. Add to this the perceived ‘trust issues’ of Indian consumers for transacting online and it was believed that e-commerce in India would take years and years to scale. As recently as 18 months ago, while the online travel model was relatively well established, it was difficult to imagine how e-tailing or online purchase of physical goods would take off anytime soon.

And then the e-tailing revolution happened, and how! Flipkart and Infibeam led the charge, starting off with categories such as books, music CD’s, etc which were easier to sell online. As reports of their phenomenal growth came in, the trickle turned into a flood and at least a hundred e-tailing startup’s sprung up across the country across all possible categories. VC money started pouring into these startup’s and valuations based on annualized Gross Merchandize Value (GMV) multiples became the norm. Hygiene factors such as internet and card base reaching critical mass had helped but the real reason why sales took off was perhaps a small innovation in the payment model called Cash on Delivery. It allowed internet consumers to ‘order’ without paying upfront and allowed them the luxury of seeing the product (or at least the packaging box 🙂 ) before they paid for it. Logistics companies such as Bluedart and Aramex supported this model and trained their employees to collect payments. COD entails an extra charge of Rs.75 to 100, but consumers don’t seem to mind. Suddenly the limitation imposed by card base or trust issues for online purchase were redundant. Moreover, India has a large parallel ‘cash economy’ which has its own dynamics and cash payments are the preferred mode for all non salaried professionals. It’s a win-win situation for e-commerce firms and consumers and the only flip side to the e-commerce firm is an increase in working capital requirement.

So what % of e-tailing happens through COD? E-tailers I’ve interacted with say that 50% to 80% of their sales come from COD and rejection rates upon delivery are lower than 10%. I’m not sure whether COD was the brainchild of a single e-commerce firm or whether it evolved naturally as a solution to the payment problem based on a facility logistics partners anyway provided. Nevertheless, this collaborative innovation in business model and it’s impact on e-commerce in India should be the subject of a business school case study.

The Cloud – why is this space interesting? – Uday Disley

Few things have happened in the last few weeks and days which pretty much sums up the excitement that may be in store in the cloud computing space. While the buzz might have been around for a while in the enterprise computing space, but with Amazon launching their cloud music service and Apple launching iCloud, and the impending launch of the Chorme OS the cloud seems to have become very relevant for the regular consumer on the street (or the internet). This clearly indicates few points (not in any particular order)

  • Increase in the consumption of digital content (worldwide digital music revenues were pegged at $ 67.6 Billion constituting approximately 20%-25% of the market)
  • The increase in usage of multiple devices (PC, tablets, mobile phones) for consuming the same digital content
  • Applications which enable access to ‘paid content’, having to converge on these devices
  • Wide spread penetration and usage of broadband internet (again through multiple networks), be it 3G, WiMax, wireless and wired broadband
  • At least three of The Gang of Four (Google, Apple and Amazon) are betting big on this space for enabling true mobility and making substantial revenues on the side

So how does this play out; let’s say you bought some songs on Amazon and downloaded it to your PC, but then you realized that you had a blackberry and an iPad, which you would like to interchange for listening to music at your will. In the old times you would have to wade through various compatibility issues, spend considerable time on syncing, moving it from one device to another and backing up somewhere in case you fancied buying the latest version of the iPhone. If you are looking at a market worth upwards of $150 Billion for digital content consumed by people like you and me (music, games, movies, newspapers and magazines), then having products/services to address the issue of convergence starts making a lot of sense.

While all the three players have their own take on the opportunity, Apple having launched iCloud, wants to bet on the ‘have any Apple product and have everything seamlessly synced’ theme, Amazon has its device agnostic service with ‘cloud player’ and ‘cloud drive’ and Google has its lose your device, but not your data theme with Chrome OS. But essentially the cloud is the common thread that runs across these services and a lot is riding on these products becoming popular (and making money on the side to hold everyone’s interest).

It would be interesting to see how these products/ services will take off in India, given the fact that consumption of ‘paid digital content’ is negligible and penetration of multiple devices even more so. But going by the availability of Bollywood songs (in plenty) on Amazon and apparent (large) plans of Netflix to enter India, there seem to be more people excited by the prospects than just me.

Mentoring 2.0, Y not YC? – Deepak Srinath

I recently wrote a blog piece about the growing trend of self professed ‘mentors’ in the startup world. This generated a lot of feedback from friends in the startup community saying how much it struck a chord with them. Interestingly enough, we often receive the suggestion that Viedea should start aYCombinator type of startup accelerator model adapted for India (for those of you not familiar with it, YC developed a model of making a small seed investment and then working closely with founders over an intense 3 month boot camp http://ycombinator.com/). On the face of it this makes a lot of sense – we are probably the only advisory firm in India focused exclusively on the VC ecosystem, we understand what it takes to ‘dress up’ a firm for funding and all of us on the team have entrepreneurial as well as operating experience. We’ve spent a lot of time thinking about the mentoring/incubation issue and continue to shy away from it.  I thought I’d share a few ideas on what would make a startup accelerator work (and perhaps these are reasons why we don’t start one 🙂 ) –

1. Rockstars and Hackers – The people who founded and/ or the people who provide mentorship at the most successful startup accelerators in the world- YC, Techstars, etc- are bona fide rockstars. They are super successful entrepreneurs, hackers or investors. Their achievements and aura not only enables them to give great advice to entrepreneurs, they also have the networks to open doors to investors, customers and other advisors. This quote from a YC alumnus in a  NYTimes article on YC says it all, “It’s like Rob De Niro wants to start an acting school. Do you want to join it? You get to work with him every week, you might even get a small little movie deal out of it at the end.”

My take – You need to be a rockstar to coach potential rockstars. Great successes (and great failures) along with being super well networked are necessary ingredients for mentoring entrepreneurs.

2. Focus– Successful startup accelerators in the US are mostly focused on tech startups, and almost invariably on internet/mobile startups. The YC founders are hackers themselves and take great pride in it. Mentors at these programs have specific areas of expertise, be it marketing, product management, technology or finance.

My take – The mentoring program cannot be one size fits all. It needs to be focused on a specific domain and the mentors on the program need to have real skills. I attend startup events where a lot of general fluff is dispensed in the name of mentoring. The real value to a start up is when a mentor gives them concrete, actionable guidance to solve specific problems.

3. Peer mentoring – We share our office space with a startup. We’re constantly bouncing ideas off each other and sharing learning’s. The energy in the space is infectious. Commenting on my previous blog on mentoring (http://blogs.vccircle.com/500/mentoring-the-mentor/), GautamSinha, a good friend and founder of myfirstcheque.com, wrote about the importance of ‘peer’ mentors. I couldn’t agree more.

My take – A well run shared physical space for startup’s is a great idea. Entrepreneurs will learn more from their peers than through formal advice. I’d like to emphasize that this model requires a focused, highly networked and visible person or team running it for it to succeed. The Startup Center in Chennai is a great initiative and hopefully will validate the benefits of a well run shared space for startups.

4. Be rich before you mentor– This sounds a little frivolous, but let me explain why it’s important.  A lot of people seem to be getting into the mentoring business of late, which is great if they have the right experience, expertise, etc. However, this is a long haul business. You’ve got to invest all your time and energy for five years at the very least before returns (may) kick in. In the interim, there is very little income.  Unless you have other sources of income, this is going to be very frustrating.

My take – If you strip it down to basics, the entrepreneurship game is all about making truckloads of money (I’m already anticipating the ‘higher calling’ type of comments :)). Now why would an entrepreneur take advice on how to do this from somebody who’s not made sacksful of it? Ergo, be rich before you mentor!

What do you think?

Seed stage investing gets super bullish, but what about exits? By Deepak Srinath

Are early-stage investors, both in India and the USA, caught up in a bubble of their own creation?

Seed funds and early-stage investing in India seem to have come of age in a big way. Apart from the number of seed funds that are being raised or already raised, a number of Y-Combinator variants (incubator/mentorship models) are being set up across the country. Being in the middle of all these as an i-bank, it’s incredible to see angels competing fiercely for deals, unlike even a year ago when start-ups desperately chased a handful of angels or seed funds for money. This is indeed a very exciting time for entrepreneurship in India and I believe that the support system for starting up and raising capital is only going to get better over the coming years.

It is important to draw a parallel to the early-stage ecosystem in the USA, simply because there is a certain degree of overlap in participants and the Indian early-stage investor community tends to reflect Silicon Valley models and ‘market sentiment’. The USA is witnessing something equally fascinating in its early-stage funding scenario. The angel investor/incubator/mentorship model has been around for many years in many variants and forms the bedrock of the Silicon Valley start-up machine. What is different now is the ease with which a startup can raise angel money and the easy terms on which they are doing so.

The recent launch of a fund called the Start Fund is a great example of this. The Start Fund commits a blanket $150K of convertible debt to every start-up coming out of the Y-Combinator program, with valuation pegged to the next round of angel or seed funding. No diligence, no seed stage valuation expectations – just a simple, collateral-free loan that gets converted to equity whenever the start-up raises a follow on round! I don’t think it can get any better for start-up entrepreneurs, whether they are in India or the USA.

This obviously leads to the predictable question: Are early-stage investors, both in India and the USA, caught up in a bubble (or should I say ‘cloud’) of their own creation or is the optimism justified? In a recent April Fool spoof article on Techcrunch, Dan McLure, who is part of a Silicon Valley startup fund called 500 Startups is quoted as saying, “We are at a unique point in history, where any two people can create a new startup and have a nearly certain chance of at least modest success. Even if the product fails completely, Google and Facebook will compete to acquire the team and investors will at least get their money back.”

Facetious as it is, I actually think there may be an element of truth to this. I proceeded to dig out some numbers on the acquisitions made by Google and other tech/internet firms (Source: Wikipedia and company websites), and the numbers tell their own story:

Company Number of acquisitions
Facebook 10
Yahoo! 62
Microsoft 128
Cisco 185
Google 94

No matter how much of a bubble early-stage investing may be in the US, there are hundreds of tech companies that have a strong DNA of making acquisitions as part of their core growth strategy. This creates a safety net that buffers the hyper aggressive leaps of faith seed and early-stage investors are making in the US. In fact according to the 2010 Angel Market Analysis Report by the Center for Venture Research at the University of New Hampshire. 66% of angel exits happen through M&A .

While the euphoria around angel and early-stage investing in India is fantastic, I cannot think of a single tech, media or internet entity here that will make multiple acquisitions every year. IPO’s will only give exits to a handful of funded start-ups; a robust acquisitive universe is critical for the sustainability of early-stage investing in India. Along with developing the ecosystem to create and grow start-ups, investors and entrepreneurs have to focus on creating the exit ecosystem as well. Hopefully, this will emerge over the next 4 to 5 years, in time to provide exits for the current wave of early-stage investments.

The Goldspot syndrome of net advertising – By S.V. Krishna*

I frequent a kirana store, where the same Goldspot- the old fizzy orange drink- advert remains painted on its wall for the last twenty five years. This advert is neither targeting an audience nor is it creating brand awareness. But it has succeeded in creating some bit of nostalgia for people of my generation. But it is a plain (damn) uneasy feeling- I was not too fond of the soda; and to make it worse the advert reminded me of punishment in school and cricket matches televised with only one camera.

Thankfully times have changed, but not the functionality of it. The Goldspot syndrome has taken over the net. I was so pissed off with soda based internet advertising. Adverts that showed on websites seemed similar to the queries I had made on Google and I would see the same companies again and again. I wonder why were publishers selling their inventory to static banners on the net and I bet the companies advertising did not see any return on their investment for such banners.

To make it worse- If I made a query on logistics- I would see a host of company adverts that did only logistics. I did not get what I wanted. Suddenly one day I was surfing the Disney website for a package and what did I find as I went in to another site- I found a customised Disney package waiting for me to grab. What frightened me was that the package was customised to my needs.

Curiously I began asking my friends in the adnetwork world as to what was happening. A couple of them said that real time bidding for inventory coupled with predictive analysis of user behaviour was becoming the next best thing for advertising on the net. I am certain that this kind of targeted advertising will create better RoI for the advertiser.

Are there companies trying this? I can think of one company that has already done this and its business model is based on technology licensing plus revenue share of a sale made based on predictions. Firms that made a business out of licensing ad serving platform are going to become redundant in this new world unless they build smart targeting tools and sophisticated data analytics algorithms. The smarter Ad network firms are all scrambling to build tools with lots of data analytics and predictive algorithms.

The world of the net is getting deeper and this sort of business can be scaled up. Then there is so much data on user behaviour that advertising online is going t change drastically if one knew what to do with it. VCs will invest in such companies.

The kirana store is finally repainting his store, certainly the net does not want to be stuck in this Goldspot syndrome forever.

(*S.V. Krishna is a journalist who has worked with some of the leading Business Publications in India. He is a guest blogger for Viedea)

The J Curve myth – By Aravind G.R

How long did it take the ‘Technology Empires’ to build their empires (from scratch)?

While the ‘J curve’ (or hockey stick in Indian parlance) is the norm in almost every business plan that an early/growth stage company makes (and we are often guilty of being perpetrators of the J Curve biz plan). It would be a revelation to see what the actual growth curves were for the tech empires (read: blockbusters of today, er, well, yesterday also).

The table in this blog splits the top 100 tech companies into Rocket Ships, Hot Companies and Slow burners based on their ‘rate of growth’. Interesting to see that the’ Rocket Ships’ took an average of 5.3 years to reach the magic mark of $50 million in revenue.

(Granted, this list doesn’t include the more recent ‘Lightspeeders’ (I couldn’t think of things faster than rocket ships) like Groupon, Facebook, Zynga et all who are claimed to have reached the magic marks in a matter of months if not years. These companies actually ‘J curved’ really fast! But, you can count these Lightspeeders with the fingers in just one hand.)

So with the exception of a tiny number of Lightspeeders, practically, the fastest companies take 5-6 years to reach a certain respectable revenue stage (note: this doesn’t mean an exit opportunity for VC’s). The duration is much more stretched in a country like India, where it takes longer than the US norm for start up’s to reach a certain scale. Investors need to factor that into their investment thesis for India.

 

Why 2011 is not 1999 – By Alap Bharadwaj

Are you nervous about internet valuations yet? If you aren’t, then you might want to consider checking out this fabulous article on dealbook called – Investing like its 1999! The article discusses the possibility of a new tech bubble and is interesting as it highlights both the similarities and differences between the situation in ’99 and ’11. There are some great anecdotes on some of the more notorious failures from the bubble era and these indicate why it might be different this time around. My personal take is that while the fundamentals are a lot stronger this time around, the problem centers around applying the same valuation exuberance that Facebook, GroupOn and Zynga (companies with proven scale in terms of BOTH users and revenues) command to companies that are in their growth phase.

Greasing restaurants with funds – By S.V.Krishna (Guest Author))

Remember those greasy and sweaty (yet tasty) quick service restaurants or Darshinis that sprouted in Bangalore during the late eighties. I never really enjoyed jumping in to the queue to purchase my food coupon in those sticky food dens.

Still it served its purpose- I could have a quick snack after school. It was a time when entrepreneurs- from Mangalore- were able to open one restaurant and in a couple of years scale the model up within the city.  By the end of the nineties the Darshinis and Sagars were all to common here. These entrepreneurs were content and I wonder if they ever knew what VC funding was.

I was out the other day in a food court and I saw a couple of old restaurants like the Taj and New Krishna Bhavan experimenting with the fast food or quick service model- were even an element of branding comes in to play. I was curious about this development and I met one of the owners of such a restaurant to find out how these dirty old dens became conscious about brand and image.

Then I almost choked, as I swallowed the roti that he served me. Don’t worry the food was great- it startled me because he said he was VC funded. Come on! What was the world thinking?

Suddenly grease seems to taste like cream to angel investors and VCs. I hear these entrepreneurs talk about business models when previously they would only be talking about the flour and the dough in store.

To make matters worse- I found 5 such investments in restaurants and interest is growing. Strangely I have lost my appetite again- I begin to wonder will money be burnt or will it find itself in a bottle of red wine.

Only time will tell what business models will work- I know that VCs have taken a stand on casual dining, QSRs and fine dining.

Then I can tell you that it is a bet that they can take because Indians are eating a lot and statistics show a rise in consumption inside the urban Indian’s stomach. For a short period of time all these business models will only grow and VCs can expect a return. But will the sum affect be the creation of a national chain. That is a foresight left to the entrepreneurs and not the VC’s.

Mentoring the Mentor – Deepak Srinath

A couple of years ago, when Viedea was a relatively new start up, I was approached by somebody who offered to become our mentor. I remember being surprised, because the person neither had experience of entrepreneurship nor of leadership in a corporate set up.  Needless to say, we politely declined the offer.

As the number of entrepreneurs and startup’s grow in India, it is but natural that various elements of the support ecosystem also develop.  Organizations like TiE and NEN, angel Networks like IAN and Mumbai angels are all doing a phenomenal job of supporting entrepreneurs. So too are numerous individuals and private organizations like Mentorsquare, Morpheus, etc. who have created innovative models which hopefully will create the sort of support ecosystem Indian entrepreneurs need.

However, the trend that has left me partly amused and partly concerned is the rapidly growing breed of entrepreneurs who are in the “business of mentoring and incubation”.  I have interacted with many such “mentors” over the last few months and barring a few exceptions most have left me with the feeling that they do not have adequate experience or skills to mentor a startup. Some of them are barely out of college themselves and many of them claim to be serial entrepreneur s (on closer inspection, it’s more like ‘serial company starters’, none of which have managed to last beyond a year).  It’s extremely worrisome that young entrepreneurs with smart ideas could be signing up such mentors, giving them equity and wasting a lot of time in the bargain.

A good mentor is a critical part of an entrepreneur’s journey. A few tips for entrepreneurs from my own experience –

  1. Choose your mentors wisely. Sometimes, finding and pitching to the right mentor is as difficult  and as important as finding the right investor,
  2. You may need multiple mentors on your entrepreneurial journey, for different stages of your venture or for different domain skills. It is likely that you will outgrow a mentor as your business evolves and takes different shapes. Make sure your relationship with the mentor is flexible and not joined at the hip.
  3. Decision making should never be delegated to the mentor. The mentor’s role should be to give you perspective and advice, not to make decisions on your behalf.

A few months ago I was approached by a leading incubator to empanel myself as a mentor. However, I did not feel I was qualified to be a mentor just yet.  As an entrepreneur I continue to learn immensely  from my mentors. Only when we have achieved the goals we have set out for Viedea will I believe that I have the right to mentor other entrepreneur’s and share my experiences.

%d bloggers like this: